Why some analysts are upgrading SNC despite the selloff

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SNC-Lavalin Group Inc. (SNC.TO) won’t reveal the location of a “serious problem” in its mining business that fueled an epic share rout Monday. But analysts are pointing the finger at Chile.

AltaCorp Capital, Desjardins Capital Markets, Canaccord Genuity and Raymond James say a copper mine run by Codelco, Chile’s state-owned copper producer, is the probable source of SNC’s pain. SNC Chief Executive Officer Neil Bruce declined to identify the project in question, saying only that the troubled contract had been awarded in 2016.

Based on that date, “the contract is likely an engineering, procurement and construction contract for the construction of sulphuric acid plants for Codelco,” AltaCorp’s Chris Murray said Tuesday in a note.

The mystery mining fiasco contributed Monday to the biggest decline in more than 25 years for Montreal-based SNC, which also took a hit from a writedown on its business in Saudi Arabia amid a diplomatic tussle with Canada.

SNC is working to extricate itself from a pending legal showdown with Canadian prosecutors over past corruption charges. The lack of a settlement with Canada has probably cost SNC more than $5 billion in lost revenue and continues to damage its reputation internationally, Bruce told Bloomberg TV in an interview last month.

Daniela Pizzuto, a spokeswoman for SNC in Montreal, declined to comment on whether Codelco was the source of the problems. Codelco also declined to comment.

Client Satisfaction

Part of the reason for the troubled project’s cost overruns stemmed from a desire to “satisfy the client,” which led SNC to forgo its risk-mitigation processes, Bruce told analysts on a conference call Monday. The CEO said the project would be completed by the start of the second quarter.

SNC-Lavalin announced two contracts with Codelco in November 2016. One involved the replacement of an effluent treatment plant at the Chuquicamata copper smelter in northern Chile to comply with new environmental regulations. The second was for the construction of two sulphuric acid plants at the same location.

The smelter halted operations in December and was expected to resume in February, but now Codelco says it will be offline through March. The work is taking longer than expected in part because the miner first thought it could meet requirements with an upgrade of old plants, but later decided to build new facilities, Codelco Chief Executive Officer Nelson Pizarro has said.